Settlement agreements are legally binding contracts which can be used to end the employment relationship on agreed terms. They waive an individual’s right to make a claim to a court or employment tribunal on the matters that are specifically covered in the agreement. Settlement agreements may be proposed prior to undertaking any other formal process (with the exception of child or adult safeguarding concerns) and they usually include some form of payment to the employee by the employer and may also include a reference for future employment.
In order to reach a settlement agreement, in relation to an existing employment dispute, employers and employees can hold a ‘without prejudice’ conversation with the prior agreement of both parties. If an agreement isn’t reached then the situation reverts back to where it was prior to the without prejudice discussion.
Any statements made during a ‘without prejudice’ meeting or discussion cannot be used in a court or tribunal as evidence where an existing dispute exists. This ‘without prejudice’ confidentiality does not apply where there is no existing dispute between the parties. Section 111A of the ERA 1996 was therefore introduced to allow greater flexibility in the use of confidential discussions, as a means of ending the employment relationship. Section 111A, which runs alongside the ‘without prejudice’ principle, provides that even where no employment dispute exists, the parties may still offer and discuss a settlement agreement, in the knowledge that their conversations cannot be used in any subsequent unfair dismissal claim.
For a settlement agreement to be legally binding the following conditions must be met:
- The agreement must be in writing;
- The agreement must relate to a particular complaint or proceedings where a dispute exists (to be legally binding for these purposes, a settlement agreement has to specifically state the claims that it is intended to cover);
- The employee must have received advice from a relevant independent adviser (such as a lawyer or a certified and authorised member of a trade union) on the terms and effect of the proposed agreement and its effect on the employee’s ability to pursue that complaint or proceedings before an employment tribunal;
- The independent adviser must have a current contract of insurance or professional indemnity insurance, covering the risk of a claim by the employee in respect of loss arising from that advice;
- The agreement must identify the adviser;
- The agreement must state that the applicable statutory conditions regulating the settlement agreement have been satisfied.
In addition to the legal requirements, there are many things to think about as an employer when considering entering into a ‘without prejudice’ conversation and it is useful to be prepared for all eventualities. Prior to the discussion you’ll need to think about:
- How far you’re prepared to go financially and are there any payment restrictions within the sector?
- Will the payment be made without deductions of TAX and NI? There are financial implications if the payments aren’t in line with HMRC requirements;
- Who will pay for the employee’s legal fees?
- The cost to the employer for HR and legal advice in relation to drafting a settlement;
- Ensure you give your HR and legal advisor the full facts in order for the settlement agreement to cover all aspects of the case;
- You must give the employee time to think about the agreement and of course you’ll be paying salary during this period;
- Ensure you seek full HR and legal advice before entering into a without prejudice conversation.
FusionHR can provide advice to your business in relation to without prejudice conversations and settlement agreements. If you think you may need our help please speak to your HR Advisor, contact us on 01924 827869 or email firstname.lastname@example.org